Friday, November 18, 2011

"Rob Arnott: Four Asset Classes at a Bargain"

While I have great respect for Mr. Arnott and have dozens of 'Arnott posts', particularly on expected future returns and the role of cash dividends in equity market returns, these four asset classes are not the field where I hunt.
That said Rob's work is always worth a look and should get one thinking.
From the Reformed Broker:

Rob Arnott of Research Affiliates is one of the most important voices in portfolio management of our era. His overarching theme is that the 3 D's - Deficits, Debt and Demographics - will work as a headwind preventing traditional 60/40 stock-bond portfolios from achieving success going forward.

He posits that the impact of these features on the global economic
situation will be a stubbornly high rate of real inflation. As a
remedy, he's created a "toolkit" of investment asset classes that can be
both non-correlated to traditional indices and perform above the rate
of inflation on a go-forward basis.

We know that deficits, debt and demographics are, to a large extent,
inexorable - there is little that can be done by any legislator or
central banker in the world to change these realities. So given that,
what is an investor to do?
Here's Rob:

Over the past two years, we have encouraged investors to
place a greater emphasis on real return asset classes and the emerging
markets (where our 3-D headwind is a relative tailwind). We also
advocate using an expanded inflation-protection asset class toolkit and
tactical management to produce substantive real returns in such an
environment.2 Key tools in the toolkit: traditional real return asset
classes (TIPS, commodities, and REITs) and what we have labeled “stealth
inflation fighters” such as bank loans, emerging market local currency
debt, high yield bonds, and convertibles

The bad news is that the headwinds represented by the 3D's are not
going anywhere anytime soon. The good news is that the tools we can use
to fight those headwinds have gotten markedly cheaper this fall as
other managers have carelessly sold asset classes they do not fully
understand....MORE